On September 16, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation1 with Belize.

Real GDP growth reached 3.6 percent in 2014, up from 1.5 percent in 2013 and well above the five-year average of 2.9 percent. A rebound in agriculture, strong performances in tourism, electricity, construction and services offset the significant decline in oil-related activities. The fall in international oil and food prices pushed headline inflation (y/y) to -0.2 percent as of December 2014. Despite strong tourism receipts, falling exports and relatively strong imports widened the external current account deficit to 7.6 percent of GDP in 2014, up from 4.4 percent of GDP in 2013. PetroCaribe and other official disbursements continued to finance the current account deficit and help build international reserves (equivalent to 5 months of imports at end-December 2014).

The fiscal stance deteriorated significantly in FY 2014/15 (April–March). The primary fiscal balance recorded a deficit of 1.5 percent of GDP, down from a revised deficit of 0.2 percent of GDP in FY 2013/14 and well below the surplus of 1 percent of GDP envisaged in the FY 2014/15 budget. Revenue collection remained in line with budget targets. Spending continued to grow well above budget targets. Financing of the fiscal deficit essentially came from a drawdown of PetroCaribe deposits and official external loans. Relatively strong GDP growth helped maintain public debt around 76 percent of GDP.

Private credit growth recovered and reached 4.7 percent in 2014, up from 3.5 percent in 2013, supported by strong real estate credit and loans to the sugar sector, while broad money grew by 7.9 percent. The banking system remained highly liquid. Non-performing loans (NPLs) declined to 15.7 percent at end-December 2014, down from 17.6 percent at end-2013. The banking system’s reported capital adequacy ratio (CAR) stayed above 21 percent. The termination of major correspondent banking relationships with Belizean banks has so far had a limited impact on the financial system and economic activity.

Growth over the short-to-medium term would hover around 2.5 percent, in line with the assessment made during the 2014 Article IV Consultation. Inflation would remain subdued owing to the exchange rate peg and moderate inflation in trading partners. However, the fiscal outlook could be worse due to excess spending. The primary fiscal balance would remain in deficit for a while as the political climate further exacerbates spending pressures and hinders revenue-enhancing reforms. Expansionary fiscal policies would increase imports in the context of modest growth of exports, widening the external current account deficit. International reserves could decline to uncomfortable levels, especially if compensation for the nationalized utilities is paid and repatriated.

Executive Directors noted the recent improvement in economic activity, despite the significant deterioration in the fiscal stance and the widening external current account deficit. Belize’s economic outlook is characterized by sluggish growth, weak fiscal stance, and external and financial sector vulnerabilities. They welcomed the settlement reached on one of the two nationalized companies but noted that significant contingent liabilities from these nationalizations remain, which could further raise the already elevated debt levels. Against this backdrop, Directors called for a concerted effort to reduce vulnerabilities, rebuild policy buffers, and accelerate medium-to-long term growth.

Directors underscored the importance of prompt and credible fiscal efforts that would boost investor confidence and private investment. In this context, they urged the authorities to begin to progressively raise the primary balance to levels consistent with debt sustainability. This could be achieved by removing exemptions and zero-ratings from GST, building a stronger revenue administration that contains leakages, and limiting current spending, including through reform of the public officers’ pension scheme. Directors agreed that public sector reforms and stronger public financial management, especially internal controls, audits and procurement practices, would reduce low-quality spending and should not be delayed.

Directors welcomed the authorities new Growth and Sustainable Development Strategy (GSDS). In order to ensure credible implementation of the GSDS, Directors recommended that the authorities seek to tap into all available resources, domestic and external. Domestic resources can be mobilized through enhanced domestic revenue collection and spending rationalization, which would create the fiscal space needed for greater investment in human capital. External resources can be mobilized through international partners and well-designed public private partnerships. Directors stressed that the success of any growth strategy would require well functioning financial markets, supporting infrastructure and regulation for key economic sectors such as agriculture and tourism, an attractive business environment, greater liberalization of domestic markets, including labor markets, and greater diversification of export markets.

Directors welcomed continued progress in financial sector reforms, including preparation of a financial crisis management plan and bank resolution templates with technical assistance from the Fund. Directors also welcomed the recent strengthening of banks’ balance sheets, but noted that significant vulnerabilities remain and were heightened by the recent termination of some corresponding banking relationships. Directors are encouraged by the authorities’ determination to keep the banking system under tight supervision, and reiterated the call for an asset quality review of all banks to fully assess their true strength. Directors noted the challenges in collateral valuation and their weak loss absorption capacity in the context of illiquid markets. Therefore, Directors recommended a gradual increase in provisioning to fully cover all loan losses, secured and unsecured. It is also important to continue preparing financial stability reports, including bank stress tests that fully take shortfalls in provisioning into account.

Directors noted that the deficiencies identified by the Caribbean Financial Action Task Force (CFATF) have been mostly addressed, allowing Belize to recently exit the CFATF follow-up and monitoring process. Important reforms are still needed to ensure effective implementation of Belize’s AML/CFT regime in line with recent Financial Action Task Force (FATF) standards. Directors concurred that the recent termination of corresponding banking relationships with Belizean banks and banks in many other countries could have a significant impact on financial stability and economic activity in the affected countries. They urged the authorities regulating international banks that are terminating correspondent banking relationships to better clarify their expectations of how these international banks should deal with local banks they perceive as “high risk.”

Belize: Selected Economic Indicators

Proj.

2011

2012

2013

2014

2015

(Annual percentage change, unless otherwise indicated)

National income and prices

GDP at constant prices

2.1

3.8

1.5

3.6

2.2

Nominal GDP (US$ millions)

1,488.9

1,573.9

1,624.3

1,699.2

1,762.8

Gross domestic investment 1/ 2/

13.7

13.7

15.9

16.1

15.8

Gross national savings 1/

12.6

12.5

11.0

8.5

9.6

Consumer prices (end of period)

2.3

0.8

1.6

-0.2

0.7

Consumer prices (average)

1.7

1.2

0.5

1.2

0.1

Real effective exchange rate

-10.0

1.9

-1.0

0.4

…

Money and credit

Credit to the private sector

-1.2

1.1

3.5

4.7

3.2

Money and quasi-money (M2)

5.6

11.0

1.4

7.9

3.7

(In percent of GDP, unless otherwise indicated)

Central government 3/

Revenue and grants

27.7

26.4

27.7

29.2

27.5

Current expenditure

24.0

22.3

23.7

24.6

25.6

Capital expenditure and net lending

4.7

4.6

7.4

8.5

7.0

Primary balance

2.3

1.3

-0.2

-1.2

-2.6

Overall balance

-1.1

-0.5

-3.5

-3.9

-5.2

External sector

External current account 4/

-1.1

-1.2

-4.4

-7.6

-6.3

Overall balance of payments (US$ millions)

35.1

35.9

116.0

81.8

17.8

Public and publicly guaranteed debt

80.5

75.6

76.1

76.0

78.1

Domestic debt

11.1

10.6

10.2

10.1

12.7

External debt

69.4

65.0

65.9

65.9

65.4

Gross international reserves (US$ millions)

253.1

289.0

405.0

486.8

504.5

In months of imports

3.0

3.2

4.2

5.2

5.2

Sources: Belize authorities; and IMF staff estimates and projections.

1/ In percent of GDP.

2/ Including inventory accumulation.

3/ Fiscal year ends in March.

4/ Including official grants.

1 Under the Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

But the Washington-based financial institution also noted the recent improvement in economic activity, despite the significant deterioration in the fiscal stance and the widening external current account deficit.

According to the IMF, gross domestic product (GDP) growth reached 3.6 per cent in 2014, up from 1.5 per cent in 2013 and well above the five-year average of 2.9 per cent.

It said a rebound in agriculture, strong performances in tourism, electricity, construction and services offset the significant decline in oil-related activities. The fall in international oil and food prices pushed headline inflation to -0.2 per cent as of December 2014.

But the IMF said that despite strong tourism receipts, falling exports and relatively strong imports widened the external current account deficit to 7.6 per cent of GDP in 2014, up from 4.4 per cent in 2013.

It said PetroCaribe, the Venezuela-led oil initiative, and other official disbursements continued to finance the current account deficit and help build international reserves equivalent to five months of imports at end-December 2014.

But the IMF said that the fiscal stance deteriorated significantly in the financial year 2014-15 and that the primary fiscal balance recorded a deficit of 1.5 per cent of GDP, down from a revised deficit of 0.2 per cent of GDP in financial year 2013-14 and well below the surplus of one per cent of GDP envisaged in the 2014-15 budget.

The IMF said private credit growth recovered and reached 4.7 per cent in 2014, up from 3.5 per cent in 2013, supported by strong real estate credit and loans to the sugar sector, while broad money grew by 7.9 per cent.

The banking system remained highly liquid. Non-performing loans declined to 15.7 per cent at end-December 2014, down from 17.6 per cent at end-2013.

The IMF said it welcomed the settlement reached on one of the two nationalised companies but noted that significant contingent liabilities from these nationalisations remain, which could further raise the already elevated debt levels.

It called for a concerted effort to reduce vulnerabilities, rebuild policy buffers, and accelerate medium to long term growth and underscored the importance of prompt and credible fiscal efforts that would boost investor confidence and private investment.

The IMF agreed that the recent termination of corresponding banking relationships with Belizean banks, and banks in many other countries, could have a significant impact on financial stability and economic activity in the affected countries.

The Fund urged the authorities regulating international banks that are terminating correspondent banking relationships to better clarify their expectations of how these international banks should deal with local banks they perceive as "high risk."

IMF cautions on wider impacts of loss of correspondent banking in Belize and the Caribbean

The International Monetary Fund (IMF) issued its most recent report on Belize on Monday, following its September 2014 mission to the country, led by Jacques Bouhga-Hagbe. Much of the economic data included in the report has been the subject of recent discussions in Parliament in the context of the 2016-2017 budget debate, but the report puts the spotlight on an unresolved issue that has been in the national and regional spotlight for the past year—the loss of correspondent banking relationships (CBRs).

The IMF notes that major global banks have recently either terminated their correspondent banking relationships with many banks in the Caribbean, or have threatened to discontinue them, forcing those banks to seek out new arrangements with other banks.

In the case of Belize, the Government has reported that even after Belize found alternative arrangements, the new bank also gave notice of termination, forcing Belize to seek out other arrangements to keep its banking system functional.

The IMF explains that a correspondent bank is a financial institution that provides services, generally on behalf of a foreign financial institution. It can conduct business transactions, accept deposits, cash checks or money orders and gather documents on behalf of the other financial institution.

All international transactions conducted through the affected banks (which now have to use other local banks that still have CBRs, including local central banks) are disrupted, if not discontinued, said the IMF, pointing to transactions via cash, checks, money orders, wire transfers, credit and debit cards, and letters of credit for remittances, tourism, international trade and foreign direct investment.

“The termination of major correspondent banking relationships with Belizean banks has so far had a limited impact on the financial system and economic activity,” said the IMF. It added, though, that “…the recent termination of corresponding banking relationships with Belizean banks and banks in many other countries could have a significant impact on financial stability and economic activity in the affected countries.”

The first domestic bank in Belize to report having been cut off by Bank of America, a leading US bank, was the Belize Bank, back in April 2015. The IMF said that as of June 2015, ten banks, including two Central Banks, in five Caribbean jurisdictions had been impacted by the loss of CBRs.

“In Belize, the banks that have already lost major CBRs are of systemic proportions, with assets amounting to more than half of the domestic banking system’s total assets or about 50 percent of GDP. In other Caribbean countries, the affected banks so far are either not systemic or have other ongoing CBRs. Nonetheless, the potential loss of vital CBRs has emerged as a major risk for all Caribbean banks,” the IMF said.

The loss of CBRs could have destabilizing effects on financial and economic stability in the Caribbean, but so far, the impacts have been contained, the IMF said.

When CARICOM Heads of Government met in Placencia in February 2016, they decided to ramp up the region’s action on the political front. They announced that they would be seeking to meet with officials in the US over the coming months. At the conclusion of the Placencia meeting, CARICOM chairman, Hon. Dean Barrow, Prime Minister of Belize, said that CARICOM will employ the full gamut of options available to it to confront the banking crisis that is threatening the region. Among the suggestions is for the region to charter its own bank in the US with which to do correspondent banking business. Another suggestion is that there be business mergers of banks in the region to achieve the critical mass needed to make the Caribbean’s banking business more attractive to US banks, since it was also suggested that US banks were cutting off Caribbean banks because the fines that could be imposed if something goes awry would be too hefty compared to the earnings these US banks derive from doing business with the individual Caribbean banks. To date, there has been no further announcement from CARICOM on these proposed initiatives. Still, the problem remains a major concern for our region.

When banks are unable to process transactions for remittances, tourism, international trade and foreign direct investment, it hurts their bottom-line and thus the wider economy.

“Such disruptions affect local banks’ incomes directly as they lose significant revenue-generating businesses, but also indirectly, at least on a temporary basis, as they hit the economy as a whole and therefore banks’ customers,” the IMF report notes.

“In Belize, the new arrangements that have been put in place with the support of the Central Bank of Belize (CBB) and major credit card companies seem to be working, as international financial transactions have not been disrupted as initially feared,” the IMF noted.

Some affected banks have worked out arrangements with other banks to do wire transfers. The Central Bank of Belize (CBB), for instance, is processing these entities’ cash documents and can also process their wire transfers using its own CBRs, though the increasing volume of these new transactions will likely pose a challenge to the CBB, the IMF said.

The IMF notes that although specific reasons have not been given in termination notices sent to affected banks such as those in the Caribbean, “it is believed that this phenomenon is related to the enforcement of global regulatory standards such as on AML/CFT and prudential regulations. As a result, some customers, business lines, markets and jurisdictions are evidently being perceived as too risky and costly in terms of compliance, and are therefore being cut off.”

In meetings with US regulators in Washington last year, the delegation of Belize officials was told that there is no problem with the Belize jurisdiction. Government officials noted that Belize had become compliant with international anti-money laundering standards as well as those addressing the financing of terrorism.

According to the IMF directors, Belize has mostly addressed the deficiencies identified by the Caribbean Financial Action Task Force (CFATF) and has consequently been cleared by CFATF. However, it added that, “Important reforms are still needed to ensure effective implementation of Belize’s AML/CFT regime in line with recent Financial Action Task Force (FATF) standards.”

The IMF furthermore urged the foreign authorities regulating international banks that are terminating correspondent banking relationships to better clarify their expectations of how these international banks should deal with local banks they perceive as “high risk.”